Moving Averages in Stock Trading - How They Work and How They Can Help You Earn Money
Moving averages are a way of stock chart or so called technical analysis.
With this method you look at the chart of a stock alone and make predictions about whether it is relatively high or low at the current price.
The moving average (short MA) of a stock gets calculated from the historical stock prices, it is an average of the stock price for a timeperoid prior the actual day.
This timeperiod is also called the timewindow.
The length of the timeperiod is the most important variable for calculation.
A very common timewindow for MAs is 200 days, meaning that the average gets calculated using the last 200 days stock price.
The term 'moving' comes from the fact that the timewindow is sliding along the stock price chart as time moves forward.
Calculating a MA gives you a trend line from a stock or index chart.
This trend line smooths out the up and downturns which occur all the time in market, and can show strong trends more clearly.
By looking at the trend line you can quickly get an overlook how the stock has been moving, and avoid investing when being in a downwards move, and rather invest into an upgoing market.
Even better, when comparing the actual price of the stock with its moving average, you can make assumptions about the strength of the movement, expressed by the distance the current price has from its average.
The most common use for moving averages is to use them as a trade signal, which signalizes you to buy or sell a stock.
The simplest way for that is to treat the crossing of the stock chart line with the line of the MA as signal: If the stock price drops downward through the moving average it is a signal to sell, when the opposite happens it is a signal to buy.
The big problem with this strategy is that 'false signals' may happen often.
False signals are signals that do not turn out be correct, e.
g.
when the MA crosses the stock from down to up and signalizes an 'buy', but shortly after that drops again below the average which signalizes a 'sell'.
The problem with that is that there may have been little or no gain in stock price, but the buy and sell process costs money in form of e.
g.
broker fees.
To lower the false signal effect, there is the method not to use MA + stock price, but MA + another MA.
If you look at a stock chart you see it has many ups & downs, it is very spiky.
Now these spikes pose a problem, because they may break through the MA and fall back shortly later causing a false signal and unnecessary trade.
Now if you look at a moving average, you see it has no spikes, as it smooths them out due to its averaging.
So using a 'moving average crossing a moving average' method is less likely to produce false signals.
The timewindows for the two averages should be different of course, a common approach is take 200 days for the long one, and 50 or 38 days for the short one.
With this method you look at the chart of a stock alone and make predictions about whether it is relatively high or low at the current price.
The moving average (short MA) of a stock gets calculated from the historical stock prices, it is an average of the stock price for a timeperoid prior the actual day.
This timeperiod is also called the timewindow.
The length of the timeperiod is the most important variable for calculation.
A very common timewindow for MAs is 200 days, meaning that the average gets calculated using the last 200 days stock price.
The term 'moving' comes from the fact that the timewindow is sliding along the stock price chart as time moves forward.
Calculating a MA gives you a trend line from a stock or index chart.
This trend line smooths out the up and downturns which occur all the time in market, and can show strong trends more clearly.
By looking at the trend line you can quickly get an overlook how the stock has been moving, and avoid investing when being in a downwards move, and rather invest into an upgoing market.
Even better, when comparing the actual price of the stock with its moving average, you can make assumptions about the strength of the movement, expressed by the distance the current price has from its average.
The most common use for moving averages is to use them as a trade signal, which signalizes you to buy or sell a stock.
The simplest way for that is to treat the crossing of the stock chart line with the line of the MA as signal: If the stock price drops downward through the moving average it is a signal to sell, when the opposite happens it is a signal to buy.
The big problem with this strategy is that 'false signals' may happen often.
False signals are signals that do not turn out be correct, e.
g.
when the MA crosses the stock from down to up and signalizes an 'buy', but shortly after that drops again below the average which signalizes a 'sell'.
The problem with that is that there may have been little or no gain in stock price, but the buy and sell process costs money in form of e.
g.
broker fees.
To lower the false signal effect, there is the method not to use MA + stock price, but MA + another MA.
If you look at a stock chart you see it has many ups & downs, it is very spiky.
Now these spikes pose a problem, because they may break through the MA and fall back shortly later causing a false signal and unnecessary trade.
Now if you look at a moving average, you see it has no spikes, as it smooths them out due to its averaging.
So using a 'moving average crossing a moving average' method is less likely to produce false signals.
The timewindows for the two averages should be different of course, a common approach is take 200 days for the long one, and 50 or 38 days for the short one.